Тhe city of London and its role
as a financial center
Chapter 1.
Introduction. The Concept of the City of London.
Britain is a major financial centre providing a wide range of
specialised services. The country’s economy has for a long time been
directed through the great financial institutions which together are
known as “The City”, capital “C”, and which are mainly located in the
famous “Square Mile” of the City of London.
The “Square Mile” in the Roman Times historically emerged on the Thames
as the business and industrial nucleus of the future London. Through
centuries of business and religious developments the City assumed its
role of the world commercial centre as it is known today . When in the
20th century Great Britain lost its empire and other financial
centres got established in the world, the city adapted itself to
changed circumstances to remain a world financial leader. The City of
London has the greatest concentration of banks in the world
(responsible for about a quarter of total international bank lending) ,
the world’ s biggest insurance market (with about 1/5 of the
international market ), a Stock Exchange with a larger listing of
securities than any other exchange, and it remains the principal
international centre for transactions in a large number of commodities.
A large proportion of Britain’s wealth has been invested by the City
overseas. The City’s annual foreign income roughly double that of the
British manufacturing industries. The above proves the City’s world
significance as a financial centre. Geographically the City is a large
office area bubbling with life at daytime and comfortably quiet outside
the office hours. It’s historical sights like the Tower of London, St
Paul’s Cathedral, the Museum of London, the Monument and others as well
as the beautifully impressive architecture of the office buildings
attract crowds of visitors. The only housing project, the Barbican,
provides very expensive accommodation along with an arts centre, a
school and some official premises.
Since after the mid – 80s financial and related services have started to
expand outside the “Square Mile” though the City of London remains the
symbol and actual reality of the country’s power.
C h a p t e r 2
Britain’s Economic and Financial Position Today at Home and Abroad.
Finance and industry of the British economy go hand in hand as industry
requires a diversified network of financial institutions to develop
successfully. Although Britain’s financial power today exceeds that of
the country’s industrial achievement, the country was for years “the
workshop of the world”. It still remains a highly industrialised country
but the end of the 20th century saw tendencies for the economic decline.
Historically, after two world wars and the loss of its empire Britain
found it increasingly difficult to maintain its leading position in
Europe. The growing competition from the United States and later Japan
aggravated the country’s position.
Britain struggled to find a balance between the governments intervention
in the economy and almost completely free-market economy of the United
States. The theories of the great British pre-war economist J.
M. Keynes stated that capitalist society could only survive if the
government controlled, managed and even planned much of its economy.
These ideas failed to get Britain out of the image of a country with
quiet market towns linked by steam trains puffing slowly through green
meadows. Arrival of Margaret Thatcher, the Conservative prime-minister
in office between 1979 and 1990, discarded these theories as completely
wrong. Mrs. Thatcher claimed that all controls and regulations of the
economy should be removed and a market economy should recover. Her
targets were nationalised industries. She refused to assist the
struggling enterprises of the coal and steal industries which were
slimmed down in order to improve their efficiency. In the steel
industry, for example, the workspace was reduced from 130000 people to
50000 by 1990s and the production of 1 ton of steel by 1990 took only
3,7 man hours instead of 12 man hours in 1980. The government believed
that privatisation would increase efficiency and economic freedom would
encourage private initiative. A lot of big publicly owned production and
service companies such as British Telecommunications, British Gas,
British Airways, Rolls Royce and even British regional Water Authorities
were sold into private hands. Britain began to turn into a country of
shareholders. Between 1979 and 1992 the proportion of the population
owning shares increased from 7 % to 24%.
The Conservative government reduced the income tax from 33% to 25% as an
incentive in production. This did not lead to any loss of revenue, since
at the lower rates fewer people tried to avoid tax. At the same time the
government doubled the VAT on goods and services to 15%. Today it is
17%.
Small business began to increase rapidly. In 1984 for example there was
a total of 1.4 million small business though including “the black
economy” the figure was nearer to million. Proportionately, however,
there were 50% more of them in West Germany and the United States and
about twice more in France and Japan.
Many small businesses fail to survive mainly as a result of poor
management and also because compared with other European Community
Britain offers the least encouraging conditions. But small businesses
are important because they can grow into big ones and because they
provide over half of the new jobs. It is particularly important because
unemployment in Great Britain rose to nearly 2.5 million people and a
lot of jobs are part-time.
Energy is a major component of the economy, which depended mainly on
coal production until 1975, began to rely on oil and gas discoveries in
the north sea. Coal still remains the single most important source of
energy, in spite of its relative decline as an industry, so oil and coal
each account for about one third of total energy consumption in Britain.
Over a number of years British policy makers promoted the idea of energy
coming of different sources. One of them was nuclear energy as a clean
and safe solution to energy needs. In fact Britain constructed the
world’s first large scale nuclear plant in 1956. However, there were a
lot of public worries after the US disaster at Three Miles Island and
the Soviet disaster in Chernobyl. Also nuclear research and safe
technology is proved to be very expensive – by 1990 the real commercial
cost of nuclear plant was twice as high that of a coal power station.
Renewable energy sources such as wind or solar energy, are planned to
provide 1% of the national energy requirements in the year 2000.
Research and development (R&D) in Britain are Mainly directed towards
immediate practical problems. In fact British companies spend less on
R&D than any European competitors. At the end of the 1980’s, for example
71% of German companies were spending more than 5% of their annual
revenue on R & D compared with only 28% of British companies. As a
result Britain has been automating more slowly than her rivals. In fact
it may be the consequence of Margaret Thatcher’s views on public
spending which includes medical service, social spending, education and
R&D. “The Iron lady” argued that “if our objective is to have a
prosperous and expanding economy, we must recognise that high public
spending kills growth of industry”, as money is taken from the
productive sector (industry) to be transferred to unproductive part of
it. As a result in the 80’s only 6% of Britain’s labour had a university
degree against 18% in America, 13% in Japan and 10% in Germany.
Technical education has always been compared with Britain’s major
competitors. According to government study “ mechanical engineering is
low and production engineers are regarded as the Cinderella of the
profession”. Very few school leavers received vocational training. Since
1980’s among university graduates the tendency has been to go from the
civil service to merchant banking, rather than industry. And according
to analysts resulted from the long-standing cultural roots. Public
school leavers considered themselves “gentlemen” too long to adjust fast
to the changes of time. Efforts are now taken by the labour government
to boost technical and enterprise skills in schools. The 1999 Pre-budget
report outlined a 10 million pounds for the purpose.
Despite the favourable effect of “Thatcherism” Britain’s economic
problems in the 1990s seemed to be difficult. Manufacturing was more
efficient but Britain’s balance of payments was unhealthy, imports of
manufacturing goods rose by 40%, and British exports could hardly
compete with those of its competitors. Car workers in Germany, for
instance, could produce a Ford Escort in help the time taken in Britain.
In the 90’s among the European countries British average annual
productivity per worker took the 6th place. The revenue softened the
social problems but distracted Britain from investing more into
industry. Many analysts thought that much more should have been invested
into engineering production, managerial and marketing before the North
Sea oil declined.
The Labour government undertakes to improve the situation. In his
Pre-budget report on 9 November 1999 the Chancellor of the Exchequer
Gordon Brown set out new economic ambitions for the next decade. Under
them Britain will raise its productivity faster than its competitors to
close the productivity gap and a majority of Britain’s school and
college leavers will go on to higher education.
In the 80s British companies invested heavily abroad while foreign
investments in Britain increased too. Today in a speech in Tokyo on 6
September1999 the Foreign Secretary Robin Cook said that “Britain is a
chosen country for more investment from Japan than anywhere else in
Europe and more than thousand companies operate in the U. K.”
Mr. Cook added that the huge European Market of 370 million people was
“the largest single market in the world, a market that is set to expand
even further with the arrival of new member states”. In fact he said
investment in Britain is the highest bridge into Europe.
Britain as a world leader in “high-tech” industries
One of the three British microprocessor producers was making 70% of
British silicon wafers required for new information technology even in
the seventies. On Nov.3.1999 Techmark, a new technology market, was
launched at the London Stock Exchange. According to Gordon Brown,
Chancellor of the Exchequer, Techmark will be the London Stock Exchange
“market within a market” for innovative technological companies.
The specialised institutions are agencies created to meet the needs of
specific groups of borrowers mostly industrial and commercial – which
are not adequately covered by other institutions. They operate in both
public and private sectors. In general they offer alternative funding to
that provided by banks and building societies. Some of them were set up
with Government support and with financial backing from banks and other
financial institutions. Some public sector agencies offer financial
support to industry in Scotland, Wales, and Northern Ireland.
The main private sector institutions are finance houses and leasing
companies, factoring companies, finance corporations and Venture Capital
Companies.
Finance houses are major suppliers of hire-purchase finance for the
personal sector of short term credit and leasing to the corporate
sector.
Leasing companies buy and own equipment required and chosen by
businesses and lease it at an agreed rental rate.
Factoring companies provide cash for a company in exchange for the sums
they owe. A factoring company buys up a client’s invoices as they arise
and finances up to 80% of the value of the invoices; the rest is paid
after a period, after deduction of administration and finance charges.
Finance corporations meet the need for medium and long term capital
when such funds are not easily or directly available from traditional
sources such as the Stock Exchange or banks.
Venture Capital Companies offer medium term and long term equity
financing for new and developing businesses when such funds are not
readily available from banks and other traditional sources. The British
Venture Capital Association has 103 full members, which make up over 99%
of the industry.
Financial markets is a collection of sophisticated securities, futures
and options the money market, the euro currency market, Lloyd’s
insurance market, the foreign exchange market and markets in bullion and
commodities.
The Stock Exchange
The origin of the London Stock Exchange goes back to the coffee houses
of the seventeenth century where those who wished to invest or raise
money bought and sold shares in joint stock companies. Brokers later
opened their own subscription Economy of the country has been directed
through the City which is the nerve center of the national finance. The
greater part of the country’s income comes from invisible exports –
operations originating from the City and flowing through its channels.
A large proportion of Britain’s wealth has been invested by the City
overseas. A number of banking institutions have their head offices in
Britain but operate mainly abroad in particular regions such as Latin
America or East Asia through extensive branch networks. The major bank
in this sector is Standard Chartered. This shows how the City of London
expands its activities beyond the country’s borders; the same goes for
the influence of the London Stock Exchange and Commodities Exchanges
(particulars of the City of London as a financial center will be dealt
with in Chapter three).
Chapter 3.
The City of London as a Financial Center, its Main Institutions.
There has been a long tradition in Britain of directing the economy
through the great financial institutions together known as “the City”,
which until 1997 were located in the “Square Mile” of the City of
London. This remains broadly the case today, though the markets for
financial and related services have grown and diversified greatly.
Banks, insurance companies, the Stock Exchange, money markets, commodity
shipping and freight markets and other kinds of financial institutions
are concentrated in the solemn buildings of the City and beyond its
borders. The City of London is the largest financial center in Europe.
London is also the world’s largest international insurance market and
has the biggest foreign exchange market.
Britain’s financial service industry gives about 6.5 % of its gross
domestic products (GDP) and contributes some 35 thousand million pounds
a year. The largest contributors are banks, insurance, institutions
pension funds, and securities dealers. To help Britain’s financial
services to respond to the competition and at the same time to protect
the public investment, the Government introduced 3 pieces of legislation
to supervise financing the industry: the Financial Services Act (1986),
the Building Societies Act (1986) and the Banking Act (1987). Under
these acts investment businesses need to be authorized and they have to
obey rules set in the legislation. The main responsibility to supervise
were the Bank of England, the Building Societies Commission, the
Treasury and the Department of Trade and Industry. The Serious Fraud
office was set up to investigate and prosecute significant and complex
fraud.
The Bank of England.
The Bank of England was established in 1684 by Act of Parliament and
Royal Charter as a corporate body. Its entire capital stock was acquired
by the Government under the Bank of England Act in 1946. It is the heart
of the City of London and Britain’s central bank. The Bank’s main
functions are to execute monetary policy, to act as banker to the
Government, to issue banknote and to provide central Banking facilities
for the banking system that is the Bank is responsible for the financial
system as a whole; it is “lender of last resort”. The Bank’s main
objective is to support the Government in achieving low inflation.
Unlike some other central banks the Bank can not act independently of
the Government. Decisions on changes in the interest rates are taken by
the Chancellor of Exchequer. The Bank’s role is to advise the Chancellor
and to carry out his decisions. The 1999 (November) interest rate was
5.5%.
As banker to the Government the Bank of England is responsible for
managing the National Debt. It has the sole right in England and Wales
to issue banknote. The note issue is no longer backed by gold but the
Government and other securities. The Scottish and Northern Ireland Banks
have limited rights to issue notes and those must be fully covered by
holdings of the Bank of England notes. Coins can be provided by the
Royal Mint.
The Bank of England can influence money market conditions through
discount houses. If on any day there is a shortage of cash in Banking
system, the bank relieves the shortage either by buying bills from the
discount houses or lending directly to them.
The Bank of England is responsible for supervision of the main wholesale
markets in London for money, foreign exchange or gold bullion.
On behalf of the Treasury the Bank manages the Exchange Equalization
Account (EEA). Using the resources of EEA the Bank may intervene in the
foreign exchange markets to check undue fluctuations in the exchange
rate of sterling.
Discount Houses.
The Discount Houses are unique to the City of London (and to Britain as
a country). They occupy the central position in the British monetary
system. They act as intermediaries between the Bank of England and the
rest of the banking sector promoting an orderly flow of funds between
the Government and the banks. In return for acting as intermediaries the
discount houses have privileged daily access to the Bank of England as
“lender of last resort”.
Banks.
Banks in Britain developed from the London gold miths of the 17th
century. By the 1920s and the 1930s there were five large clearing banks
with a network across the country. In February 1996 there were 539
institutions authorized under the Banking. Act of 1987. In British
banking retail banks should be described as dominant.
Retail banks primarily serve personal customers and small to
medium-sized businesses. They operate through more than 11.350 branchers
offering cash deposits withdrawl facilities and systems for transferring
funds. They provide current accounts, deposit accounts various types of
loan arrangements and a growing range of financial services.
The main banks in England and Wales are Barklays, Lloyds, Midland,
National Westminter and the TSB group. The major Scottish banks are
the Bank of Scotland, Clydesdale and Royal Bank of Scotland.
With a relaxation of restrictions on competition among financial
institutions major banks have diversified the services they provide.
They have lent more money for house purchases, have more interests in
leasing and factoring companies, merchant banks, securities dealers,
insurance and trust companies. They provide low facilities to industrial
companies ands now support a loan guarantee scheme under which 70% of
the value of loans to small companies is guaranteed by the Government.
Plastic card technology has revolutionized cash transfer and payments
systems. There are around ninety two million plastic cards in
circulation in Britain. There are different types of cards but they
often combine functions. Cards can be used overseas too to obtain cash
from bank ATM ( Automated Teller Machines). Cash machine cards have
greatly improved customers’ access to cash. All retail banks and
building societies participate in nation wide networks of ATMs. About
two thirds of cash now is obtained through Britain’s twenty one thousand
ATMs. .A lot of them are located different places at supermarkets, for
instance.
Many banks offer electronic payment of cheques, telephone banking, under
which customers use a telephone to obtain account information, make
transfers or pay bills. Other innovations include computer-based banking
(through home computer) services over Internet and video links.
Merchant banks.
The traditional role of merchant banks was to accept bills of exchange,
to provide funds for trade and also to raise capital to British
companies through the issue of bonds and other securities. These
activities continue, but the role of Britain’s merchant banks has
diversified enormously in recent years. Although they are called “banks”
they are more involved in providing a range of professional services,
such as corporate finance and investment management, than in lending
money.
Building societies.
Building societies are mutual institutions owned by their savers and
borrowers. They have traditionally concentrated on housing finance,
long-term mortgage loans against property – most usually houses
purchased for occupation. Services have been extended into other areas,
including banking, investment services and insurance. The Societies are
one of the main places were people deposit their savings – around 60% of
adults have a building society saving accounts. Building societies offer
a variety of accounts with interest rates related to the time for
which a saver is prepared to tie up his money. So they are major lenders
for house purchases. Four of the largest Societies are planning to
become banks. The largest Societies, the Halifax, Abbey National and
Nationwide owe 45% of the total assets of the movement.
National Savings Bank.
The National Savings Bank is run by the department of National Savings.
It provides a system of depositing and withdrawing savings at twenty
thousand post offices around the country or by post. The National
Savings Bank does not offer lending facilities. Its deposits are used to
finance the Governments public sector needs.
Investing Institutions.
The investing institutions are those which collect savings and invest
them into securities market and other long-term assets. The main
investment institutions are insurance companies, pension funds, unit
trusts and investment trusts. Together they make a vast resource of
funds which are invested in securities and other assets. They own
around 58% of British shares. The British insurance industry is highly
sophisticated and serves millions of policyholders in Britain and
overseas. Policyholders include governments, companies and individuals.
The British insurance is the forth largest in the world and in
proportion to its GDP is the highest in any country. There are 2 broad
categories of insurance: long-term insurance for many years, such as
life insurance, permanent health (medical) insurance; and general
insurance for a year or less, which covers risks of damage, such as loss
of property, accidents and short-term health insurance. In 1995 there
were about 830 authorized to carry on insurance business in Britain. The
industry as a whole employs some 207.000 people, plus about 126.000 are
employed in activities related to insurance.
Lloyd’s is an incorporated society of private insurers in London.
Originally it dealt with marine insurance. Today it deals with other
classes of insurance, today it deals with other classes of insurance.
Long-term life and financial guarantee business is not covered.
Insurance brokers as intermediaries are a valuable part of the insurance
market. Lloyd’s insurance brokers play an important role in the Lloyd’s
market.
Institute of London Underwriters was formed in 1984 as an association
for marine underwriters. Today it provides a market where member
insurance companies transact marine, energy, commercial transport and
aviation insurance business. The Institute issues combined policies in
its own name on risks which are underwritten by member companies. About
half of the 58 member companies are branches or subsidiaries of overseas
companies.
Pension Funds.
Pension Funds collect savings Pension Funds collect savings from
occupational pension schemes and personal pension schemes. Pension
contributions are invested through intermediaries in securities and
other investment markets. Pension fund have a become a major force in
securities markets because they hold about 28% of the securities listed
on the London Stock Exchange. Total Pension fund assets are very big. To
protect them the Pensions Act was introduced in 1995 to increase
confidence in the security of the funds.
Investment trusts and unit trusts.
Both investment trusts and unit trusts offer investors the opportunity
to benefit from pools investments, although their respective structures
are somewhat different. Assets have grown considerably in the last few
years. So individuals are attracted by the possibility to invest rather
small amounts either on a regular basis, usually monthly, or in a lump
sum.
Investment trusts companies are companies which are listed on the London
Stock Exchange and must invest mostly in securities for the benefit of
their shareholders. The trusts are exempt from tax on money which they
get within the trusts. Some trusts specialize in particular
geographical areas or in particular markets. At the end of June 1996
there were about 350 investment trusts companies listed on the London
Stock Exchange.
In unit trusts the investors’ fund are pooled together but are divided
into units of equal size. Unit trusts are open ended collective funds
where the funds are managed by management groups. The unit trust sector
has grown rapidly in recent years. Nearly three million people are
estimated to have holdings in unit group.
Specialized institutions.
The origin of the London Stock Exchange goes back to the coffee houses
of the 17th century, where those who those who wished to invest or raise
money bought and sold shares of joint-stock companies. Brokers later
opened their own subscription rooms and in 1773 this was named the Stock
Exchange. During the 19th century the Stock Exchange developed as the
demand for capitol grew with Britain’s Industrial Revolution. The
Exchange also financed the construction of railways, bridges and dams
across the world. Today it is one of a number of highly organized
financial markets of the City. It provides trading platform and the
means of raising capital for British and foreign companies, Government
securities, eurobonds and depository receipts. Official list is the
Exchanges main market, while AIM, the Exchanges new market is for
smaller rapidly growing companies. It opened in 1995. Companies which
apply for a listing on the Exchange must provide a full picture of their
operations, i9ncluding their financial record, management and business
prospects. If a company wants to join AIM the rules are less strict.
Such companies include multimedia and high technology business.
Today the Exchange has moved away from face-to-face dealing on the
trading floor to system of dealing from member firms’ offices. The
quotations are displayed on electronic screen. Before 1986 only British
companies were allowed to operate. In 1986 deregulation, known as “the
Big Bang” allowed any foreign financial institution to participate in
the London money market. Other changes involved a system under which
negotiated commissions were allowed instead of fixed rates and dealers
are permitted to trade in securities both as principals and as agents.
Traditional retail stockbrokers are facing growing competition from
operations running by large banks and building societies.
The Exchange has its administrative center in London, with regional
offices in Belfast, Birmingham, Glasgow, Leads and Manchester.
Many companies raise new capital on the London money market. The
quiet-edged market, that is the market of Government shares, allows the
Government to raise money by issuing stock through the Bank of England.
The Exchanges now going through a further period of change which has
been described as the most significant period since “The Big Bang”.
Money markets.
London’s money markets channel wholesale short-term funds between
lenders and borrows. These operations are conducted by all the major
banks and financial institutions. The Bank of England regulates the
market. There is no physical market place; negotiations are conducted
mostly by telephone or through automated dealing systems. The main
financial instruments are CDs (Certificates of Deposit), bills of
exchange, Treasury and local authority bills and short-term Government
stocks.
Financial Futures and Traded Options.
Financial futures are legal contracts for the purchase or the sale of
financial products, on a specified future date at a price agreed in the
present. Trading and financial futures developed out of the numerous
futures markets in commodities which originate from London’s position as
a port and from Britain’s need to import food and raw material.
Options are contracts which give the right to buy or sell financial
instruments or physical commodities for a stated period at a
predetermined price.
Financial futures and options are traded on the London International
Futures and Option Exchange (LIFFE) which was established in 1982..
Commodity Exchanges
Britain remains the principal international center for transactions in a
large number of commodities, though the consignments themselves never
pass through the ports of Britain. The need for close links with sources
of finance, shipping and insurance services often determines the
locations of these markets in the City of London. There are futures
markets in cocoa, coffee, grains, rubber, sugar, pigmeat, potatoes
there.
Gas, oil for heating and petroleum are traded through the International
Petroleum Exchange, Europe’s only energy futures exchange.
Copper, lead, zinc, nickel, aluminum, aluminum alloys and tin are
treaded through the London Metal Exchange (LME), the world’s largest
non-ferrous base metals exchange.
The Baltic Exchange is the world’s leading international shipping
exchange. It contributed to 292 Mln pounds in net overseas earnings to
Britain’s balance of payments in 1995. Baltic dealers handle more than a
half the world’s bulk cargo, transportation of oil, ore, coal and grain.
All Britain’s agricultural futures markets are operated from the Baltic
Exchange and physical trading and commodities is also carried out there.
Chapter 4.
The International Role of the City of London in the World Monetary and
Currency Fields.
A recent comprehensive study of four world cities – London, Paris, New
York and Tokyo – confirmed many strength of London and described it as
possibly the most international of all world cities. The study said that
London and New York are the only two pre-eminent international financial
centers with advantages over other cities. One city that is emerging as
a financial center of the Asian continent is Tokyo.
Strengths of London include:
The concentration of business and service functions – among them support
services such as legal services, accountancy, and management
consultancy.
Efficient world-wide communication links.
A favorable position in the time zone between the United States and Far
East.
A stable political climate.
World-class service industries including hotels, restaurants, theaters
and other cultural attractions.
Britain and the City of London as a financial symbol, encouraged
international liberalization in financial services. It played a major
role in negotiating agreements closely connected with GATT (General
Agreement of Tariffs and Trade) as well as negotiations within the
Organization for Economic Cooperation and Development. Briefly, apart
from world-wide insuarence and banking strength, Britain’s important
features include:
Its foreign exchange market,. whose daily turnover of 294 Mln pounds in
1995 represented 30% of Global turnover and was more than the turnover
of New York and Tokyo combined.
The London Stock Exchange which is the biggest trade center for overseas
equities in the world; it makes 55% of global turnover.
The world’s second largest fund management center, after Tokyo.
One of the world’s biggest markets in financial futures and options.
One of three largest international bond centers in the world.
Britain’s international role in the world monetary and financial fields
became particularly in the late 1980s.
Deregulation has been the main catalyst in increasing the City’s role as
an international financial center. Fundamental reforms of 1986, known as
Big Bang affected the London Stock Exchange tremendously, because any
foreign financial institution can now participate in the London money
market. “What we were trying to do”, in the words of a former Deputy
Chairman of London Stock Exchange, “ was to create a new market, not one
just oriented toward the UK, but one that can become international”. It
was intended to secure London as the leading financial center of Europe,
and the third in the world alongside New York and Tokyo.
Many foreign banks and finance houses tried to profit from the
deregulation, some by direct competition and others by buying
long-established City enterprises. Before the Big Bang all City
stockbroking firms were British. By 1990 one hundred fifty four out of
four hundred and eight were foreign owned. The main investors in British
stockbroking are the United States, Japan and France (also see Chapter
2, The Stock Exchange).
British banks, insurance companies, building societies, and other money
lenders often prefer to invest in other areas, rather than industry, in
contrast with Britain’s competitors, for example Germany and Japan,
where the level of industrial development is higher.
Britain strongly supports the removal of national regulations and
exchange controls which restrict the creation of common market in
financial services. London is a major center for international banking.
Altogether five hundred sixty one foreign banks are represented in
Britain. They employ about 40.000 people and provide different services
in many parts of the world.
Japan and the United States are the two countries with most banks
represented in London (see the table attached). Assets/liabilities of
overseas banks in Britain have doubled in the last ten years. Overseas
banks have a very high proportion of their operations in foreign
currency.
Since the end of 1920s the Moscow Narodny Bank has been operating in
London to deal with transactions with the Soviet Union and Russia now.
A number of British banks have their head offices in Britain but operate
mainly abroad. Standard Chartered is the major bank in this sector: it
has a network of over 600 offices in more than 40 countries and employs
over 25.000 people. Standard Chartered’s activities are concentrated in
Asia, Africa and Middle East.
British banks are developing innovative banking services in their
overseas operations. For example Standard Chartered has opened the first
fully automated branches in Hong Kong and Singapore. Satellite dishes
have been installed in Barclays’ branches in Zimbabwe
London and Tokyo are the main world centers for eurocurrency dealings.
The euromarket began with eurodollars – US Dollars lent outside the
United States – and now has developed into a powerful market of
currencies lent outside their domestic marketplace. Transactions can be
carried out in eurodollars, eurodeutschmarks, euroyen, and so on. So,
euroloans are short-term trances (three to six months) given by banks at
the LIBOR rates. Eurobonds are issued for periods of five to twenty
years in currencies other than that of the issuing country.
The London International Futures Exchange trades on the floor of the
Royal Exchange building. Over 200 banks and other financial
institutions, both British and foreign, are members of the market. In
fact over 70% are overseas-owned. They make contracts in British,
German, Italian, and Japanese Government bonds.
In 1995 LIFFE announced new linking agreements with the Tokyo
International Financial Futures Exchange and Chicago Board of Trade. In
1996 LIFFE merged with the London Commodity Exchange, which is Europe’s
primary market for trading futures and options contracts in cocoa,
coffee, sugar, wheat, potatoes.
Anyone may deal in gold but, in practice, dealings are largely
concentrated in the hands of five members of the London gold market.
Around 60 banks and often financial companies participate in the London
gold and silver markets. Trading is done by telephone and electronic
communications links. The five members of the London Bullion Market
Association meet twice daily to establish a London fixing price for Gold
and this price is a reference for world-wide gold dealings.
Chapter 5.
Recent Financial Institutions (the London Club, Britain in the IMF,
British Banks in Russia).
The International Monetary Fund (IMF) and the London Club can not be
properly described as recent institutions but it is important to note
their recent activities in the light of the financial problems in
Russia.
The IMF was founded in 1944 to secure international monetary cooperation
and stabilize exchange rates. Operating funds are subscribed by member
Governments according to the volume of their international trade, their
national income and their international reserve holdings. Members with
temporary difficulties in their international balances of payments may
purchase or get credits form the IMF of the foreign exchange they need
at fixed rates if they meet the required conditions. Russia applied to
the IMF for credits.
Great Britain plays an important role in the IMF. On the 10th of
September 1999 the Сhancellor of the Exchequer Gordon Brown was
appointed to the Interim Committee of the IMF. The Committee was
established in 1974 to advise the IMF on the management of the
international monetary system as well as on dealing with any sudden
shock to the world money system. The Chancellor will lead discussions on
the reform of the Interim Committee after the proposals of the G7
Finance Ministers.
There will be also discussions on reforms to involve the private sector
in presenting the world financial prices. It is the aim of IMF to
relieve third world debt to avoid large-scale financial crises.
Among the recent developments it is important to mention the choice of
London as the location of NASDAQ-Europe. In his speech on the 5th of
November 1999, the Chancellor of the Exchequer Gordon Brown it was
excellent news for the City of London to launch a joint venture to
create a pan-European security market.
Gordon Brown said: ”NASDAQ’s decision to locate its European exchange
here represents a massive vote of confidence in the City. NASDAQ –
Europe will strengthen the UK financial services industry and reinforce
London’s position as one of the worlds’ top international financial
centers”. Mr. Brown added, “NASDAQ’s presence here will be good for the
wider economy too, not just in the UK but Europe as a whole. Job
creation and economic growth depend on efficient capital markets sending
funds to businesses to finance their expansion”.
An important move in the European monetary life was the introduction of
a single European currency, the Euro, on the 1st of January 1999. A
separate protocol recognizes that Britain is not obliged to join the
currency without a separate decision by British Government and
Parliament.
So far the Bank of England has not voted to adopt the single currency.
On the 6th of September 1999 Mr. Cook , the Foreign Secretary, stated
that if the Euro proves to be a success, it would be in Britain’s
interest to join it. Britain will first have to test whether there is
enough flexibility in British economy and if the Euro will promote
strong international investment and boost British financial services
industry.
According to the decision of European Union (EU) Heads of Government
single currency notes and coins will be introduced at the beginning of
2002 at latest.
The London Club set up in the 1980s under an agreement in London,
comprises over 600 big commercial banks whose credits are not covered by
government guarantees or insurance. There is a steering committee of the
Club which operates between the Club’s sessions. The Sessions are held
at the request of the debtors in different cities of the world.
After the collapse of the USSR, the Soviet Union bank for Foreign
Economic Affairs owed the London Club a total of over 32 Bln Dollars.
Under the latest decision on restructuring the Russian debt it was
agreed in February 2000 that the debt would be restructured. Nearly one
third of the total amount will be written of and Russia will be allowed
to have a grace period of seven years, during which it will pay only
reduced interest rates on the remaining sum. In return, the Russian
Government undertakes the responsibility for the debt and would be
considered defaulting if it fails to meet the stated conditions.
Although the London Club is not entirely a British entity the title
speaks for the significance of the city of London.
The world-wide network of British banks is not directly represented on
Russian market. Operations available are carried out only through the
branches of British banks based in other cities of the world.
Conclusions.
Although historically the heart of the financial services sector in
Britain was located in the “Square Mile” of the City of London, and this
is broadly the case now, financial institutions have moved outside the
area all over the country.
The City of London is concentration of British financial power which
makes London an angle of the New York-Tokyo-London triangular.
Though Great Britain is still a leading industrialized nation and a
member of G7 group it real power and international influence centers
around its financial activities.
Reference list.
1.David McDowall, Britain in close-up/Longman Singapore Publishers Pte
Ltd.
2.Britain’s Banking and Financial Institutions/Reference Services,
Central Office of Information, London.
Angela Fiddles, The City of London (the historic square mile).
Talking Points on Britain’s Economy/October 1999, December 1999.
Банковское дело, выпуск №12, 1998г.
Appendix :
Table 1 .
Net Overseas Earnings of Britain’s Financial Institutions
Million Pounds
Banks 6,188
Securities Dealers 1,658
Commodity traders. Bullion dealers and export houses. 556
Money Market Brokers 112
Insurance Institutions 5,952
Pension Funds 2,044
Unit trusts 724
Investment Trusts 383
Fund Managers 425
Baltic Exchange 292
Lloyd’s Register of Shipping 57
Finance Leasing 40
Non-specified institutions 1,962
Total 20,393
Table 2.
Notes in circulation.
Value of notes in circulation end February 1996 (million) No of notes
issued by denomination in year to end February1996 (million)
1 pound 56 –
5 pounds 1,067 336
10 pounds 5,688 575
20 pounds 8,579 326
50 pounds 3,104 43
Other notes 1,154 –
Total 19,648 1,280
Source : Bank of England.
Table 3.
Major British Banks 1995.
Assets Liabilities (Mln pounds) Market Capital
(Mln pounds) Staff Branches Cash dispensers and ATMs
Abbey National 97,614 10,765 16,300 678 1,267
Bank of Scotland 34,104 4,095 11,300 411 463
Barclays 164,184 18,407 61,200 2,050 3,020
Lloyds TSB 131,750 25,496 66,400 2,858 4,346
Midland 92,093 39,658 43,400 1,701 2,282
National
Westminster 166,347 13,548 61,000 2,215 2,998
Royal Bank of Scotland 50,497 4,750 19,500 687 1,009
Standard Chartered 38,934 7,757 1,100 1 –
Figure 1.
Major Banks lending to British Residents December 1995.
Table 4.
Largest Building Societies.
Rank by Group Assets Rank After Flotations and Mergers in 1977 Group
Assets (million pounds)
1. Halifax. – 98,655
2. Nationwide. 1 35,742
3.Woolwich – 28,005
4. Alliance & Leicester – 22,846
5. Bradford & Bingley 2 15,658
6. Britannia 3 14,916
7.National & Provincial – 14,133
8.Northern Rock – 11,559
9.Bristrol & West – 8,589
10. Birmingham Mdshires 4 6,725
11. Yorkshire 5 6,412
12.Portman 6 3,513
13.Coventry 7 3,379
14.Skipton 8 3,037
Table 5.
Overseas Banks in Britain
(Main Countries Represented).
Country of origin Branches of an Overseas Bank British Incorporated
Subsidiary of an Overseas Bank Representative offices Other Total
France 16 8 23 – 47
Germany 19 5 4 – 28
Italy 15 1 28 – 44
Japan 28 6 15 4 53
Switzerland 9 2 17 – 28
United States 23 9 11 6 49
Other countries 153 41 111 7 312
Total 263 72 209 17 561
Source: Bank of England.
Table 6.
General and Long-term Insurance Business 1985 – 1995.
General Insurance net premiums.
Table 7.
Growth in Unit Trusts and Investment Trusts.
Definitions.
Assets – anything owned by an individual, company, legal body or
government which has a cash value.
Big Bang – a system of major changes which brought deregulation to the
London Stock Exchange in 1986.
Bill of Exchange – an officially signed promise to pay to the
receiver of the bill, the stated at the fixed time.
Bond – a certificate issued by the borrower as a receipt for a loan
usually longer than 12 months; it indicates the interest rate and the
date of repayment.
Eurobond- an international certificate issued by the borrower for a
long-term loan (from 5 to 15 years) in any European currency but not in
the currency of the issuing bank.
Securities- general term for stocks and shares of all types.
Exchange- a market for the toll purchase of goods or securities.
Stock Exchange- a market for short or long term transactions in
securities .
Commodity Exchange- a stable market for wholesale transactions in
preferably commodities and raw materials
Money Market- a market for money instruments with a period of validity
of less than one year.
Factoring- a business activity in which a company takes over the
responsibility for collecting the debts of another company.
Fund Management- managing investors’ funds on their behalf or advising
investors on how to invest their funds.
Financial Futures- legal contracts for the sale or purchase of financial
products on a specified future date, at the price agreed in the present.
Option- A contract giving the right to buy or sell financial instruments
or goods for a stated period at a stated price.
The London Bullion Market – The international gold and silver market in
London where trade is done by a telephone or electronic links.
Hedge The purchase or sale futures contract as a temporary substitute
for a transaction to be made at a later date
Open-Ended Fund- A fund without a fixed number of shares
Quite-edged loans – Loans issued on behalf of the Government to fund its
spending.
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